Diversifying Your Short Term Investment Portfolio: Peer To Peer Lending

By Author: Scott Staudt
Total Articles: 91
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Successful investors keep a balanced blend of assets in their portfolio. Most investors will try to have a mix of short term assets with long term assets, and floating rate investments with fixed rate. Perhaps a portfolio that is skewed towards domestic stocks could use some international holdings.

Short term investment portfolios will usually include some investments in loans of one type or another. Treasury bills, which are a component of most portfolios can be looked upon as the ultimate loan: to the government. Another common short term investment may be in Certificates of Deposits or Money Market Funds. The flexibility and liquidity given by these investments is an attraction, but the yields are fairly low.

Any investor who is looking to maintain a presence in short term investments, but would like to improve on the returns of CDs or Treasury bills should consider another alternative. Such an alternative would be peer to peer loans, whereby investors become direct lenders to borrowers, and earn substantially higher returns from these loans.

In addition, to add further diversification, peer to ...
... peer lending creates an entirely new asset class, consumer loans, to a portfolio that may be limited to stocks and bonds and perhaps investments in bank CDs or savings accounts.

The concept behind peer to peer lending is very simple. A specially designed site matches borrowers who are interested in short term loans with lenders who are seeking a better return on their investments. The mechanism also allows for a better match of risk/reward ratio, since the investor chooses the borrowers to match his risk profile.

One investor may prefer a very conservative loan portfolio in his short term investment strategy and just choose those loans with the highest rating and the lowest loss ratios. This would be considered a very conservative portfolio, further protected if he spreads his investment amount out over many loans. This mix of choosing exact rating and rates, and spreading loans out over many borrowers creates a perfectly tailored portfolio. An investor who was going to lend $5,000 could pick 50 or more borrowers to lend to, and spread the risk very widely. The return on such a conservative investment would be lower than that of a more aggressive blend of loans, but the investor has the choice.

These loans are typically designed as loans that amortize over three years. The borrowers pay interest and a part of the principal each month, and this is distributed to the investor; he does not have to wait for the maturity of the loan for his principal repayment. Loans are fixed rate and with recent falling interest loan markets, offer an attractive short term investment alternative to CDs that have been paying lower and lower interest.

The sites that administer peer to peer loans have made the process very simple. The online peer to peer lending site allows prospective borrowers to list their personal profile and loan requirements and the site will list their credit information. Lenders then review the loans that match their risk/reward profile for their short term investment portfolio and pick the loans they want. This means that each portfolio is exactly suited to each investor, who has total control over the loans he will put in his investment portfolio.
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